Written by Jeremy Biberdorf
Preparing for a recession is something anyone getting ready for retirement should think about. You might have the perfect plan — but if a recession hits, your well-thought-out retirement fund may disappear faster than you had thought. The good news is there are several ways you can prepare for a recession comfortably.
1. Have an Emergency Fund
It is a wise idea to contribute an amount of money from each paycheck to your emergency fund. Even if it is not a lot, every bit counts. You and your financial advisor should decide how many months of living expenses you should save up.
Do not worry if you only have a small fund so far. Even if you only have a couple months of living expenses saved up, you still have a start. Consider keeping this emergency fund in a higher-interest savings account rather than a low-interest checking account so you earn some interest on it.
2. Stay in the Market
When the market takes a dip, your first impulse might be to sell everything and get out. But this may not be the best idea. Since many people are living longer, you will most likely need your money to last a while. Also, if you are not yet retired, you won’t need the money in your retirement portfolio. Retirement accounts can withstand more ups and downs for people who are not currently using the money and won’t need it for several years.
3. Diversify Your Savings
The closer you are to retiring, the more important it is to diversify your investments. You should never keep all your eggs in one basket because this presents a huge risk to your savings. If you have your portfolio spread around multiple sources, it is more likely that at least part of your portfolio will respond positively when the stock market is down.
One rule that many people used to use is the 60/40 rule, where 60 percent of your portfolio is invested in higher risk with a better return and 40 percent is invested in lower risk that does not pay as well. However, this rule may not be enough for people who are retiring soon. Historically, factors such as high equity valuations, low prices in commodities, and increased risks in bond funds have all served to make the 60/40 rule work. But now, you should consider an even broader mix of investments.
4. Manage Your 401(k)
It is best to think of your 401(k) as a long-term investment, which means it will experience fluctuations during market changes. And when the market is changing, you should not make major changes to your 401(k).
Maximizing your 401(k) savings now can help you save as much as possible. This is especially true if your employer offers matching contributions. Never forgo employer matching. This is free money and is one of the best ways to build retirement savings over time.
5. Pay Off Your Debt
It is especially important to pay off any remaining debt while you are still getting an income. When you are paying off your debts, you should never use your 401(k) to pay down debt.
Instead, building regular debt payments into your budget will help you get rid of debt without making your retirement savings suffer. It is a wise idea to plan to pay off a bit more of the debt each month than required. That way, when the debt is gone, you can invest the money you would have put toward your debt in your portfolio instead.
6. Earn Extra Income
More and more people are working part-time in retirement. Just because you are retired does not mean you have to sit around at home by yourself. Once you have more time, you may want to consider doing something fun, like pet-sitting or starting a small side business. You may even consider helping out at a local business. This extra income can help you supplement your retirement funds, especially in a recession.
7. Have Sources of Retirement Income
In an ever-changing market, not all your income sources are sure things. Having some stable sources of income during your retirement, such as annuities, pensions, and social security, will help ensure you are still getting an income, even if other parts of your portfolio fail. Strong dividend paying stocks are also wise to have as they are generally less volatile over time. There are plenty of dividend payers, such as Exxon and Procter & Gamble, that have paid out a solid dividend for decades without ever cutting their dividends.
8. Work with an Expert
Navigating retirement savings can be tricky, especially when the market is uncertain. Luckily, you do not have to do it alone. A financial advisor can understand your financial goals and guide you to options that will help you reach them. They can also help you make wise financial decisions. For example, if the market suddenly goes downhill, a financial advisor can encourage you to avoid making the mistake of panicking and selling immediately.
If you decide not to go with a financial advisor, many other options can guide you through retirement planning during a recession. For example, retirement blogs and forums can be an excellent place to connect with others planning for retirement and to gain invaluable advice. You can also look into retirement planning apps to help you in your journey.
9. Do It Yourself Retirement Planning
There are a lot of great online financial and retirement planning tools available to do-it-yourself types. Serious financial and retirement planning software was once only the realm of financial advisors. But that is no longer true. A financial and retirement planning application called WealthTrace allows consumers to create their own sophisticated financial and retirement plan. Consumers can also run a lot of different what-if scenarios, including what happens to their retirement portfolio during a recession.
Following these tips can give you peace of mind during any recession. Managing your finances wisely and saving up for a rainy day will help you comfortably get through any tough times up ahead.